WIN Semiconductors Corp. (3105) Earnings Call Transcript & Summary

Good morning and evening, ladies and gentlemen, no matter where you are. Welcome to WIN Semi's Result Webcast Conference for Third Quarter of 2022. My name is Joe Tsen, the Spokesman and Associate Vice President of Finance in WIN Semi. Joining me today on today's call is Steve Chen, the General Manager of Corporate Administration. Today's call is organized into 3 sections. First of all, Steve will comment on the company's results and provide brief guidance for the third quarter of 2022 and secondly, we will go through the financial in detail. After that, we will open the call for Q&A. Please freely submit your question in the input box on the webcast window throughout the conference. Before we begin, I would like to draw your attention to the Safe harbor notice on page one of the presentation slides. Please note that this presentation contains forward-looking statements. These statements are based on our current expectations. Actual results may differ materially from our expectations and the Company undertakes no obligation to update this forward-looking statements going forward. Now, let me hand over the call to Mr. Steve Chen, the General Manager of WIN Semi.

Thank you, Joe, and welcome everyone. For the quarter of 2022, WIN Semi's consolidated revenue was TWD 3.9 billion and that's down 26% quarter-on-quarter and 42% year-on-year as previously stated. This was mainly due to the impact of the ongoing inventory adjustments in the Android smartphone market, which result in a further decline in our capacity utilization rate to 40%. Our third quarter gross revenue would have 21.1% is excluding one-off factor that was we recognized one-off valuation loss on overseas investment targets held by consolidated subsidiary whose main business purpose is investment. The oversea investment target went to IPO this year, but due to significant volatility in the global economic in this third quarter, we recognized a one-off valuation loss which impact our gross margin by 5.1 percentage point. As a result, our consolidated gross margin was 16% and operating margin was negative 5.1%. Net income for third quarter was TWD 245 million and EPS was TWD 0.83. Among the shipments of different product category in the third quarter, consumer related applications including Cellular PA, WiFi PA still had the largest decline. This not only reflected the high inventory level in the market, but also reflected consumers' concern about the macroeconomic downturn. Comparatively for the industrial application-focused Infrastructure segment, while its performance also declined from the previous quarter, its revenue for the first 3 quarters of this year maintained positive year-on-year growth, as it was less affected by the macro environment. The Optical segment significantly increased quarter-on-quarter, given that it has entered a traditionally stronger season. Although the global macro environment remains challenging in the near term, our fabs with declining utilization rate offer our customers excellent opportunities. We have seen that both our microwave communication and optical customers are becoming more aggressive in the number of tape outs for R&D. Some tape outs are for existing customers to qualify our next generation process for their new products in the next 2 years, and some are for the new customers who choose us as their partner to enter new markets or new applications in the coming years. The world has entered the post-COVID era, and we have received increasing number of customer visits and new project rollouts as we approach the end of this year, mainly focusing on some end market trends. In addition to the continued penetration of the 5G mobile communication and the deployment of 5G infrastructure, the outsourcing trend of optical communication and optical sensing is also emerging. In particular, customers interest and engagement with us in advanced process technologies, such as third generation semiconductor materials including GaN on silicon carbide and indium phosphide, are higher than ever. During the economic downturn, we slowed down our pace of capacity expansion, but continuing to actively invest in R&D to seize the opportunities when the dawn comes. Looking ahead to the fourth quarter of 2022, our revenue is expected to decline low-teens quarter-on-quarter and the gross margin will be between the level of high-teens and low-20s. I will turn the call back over to Joe. Thank you.

It is pleasure to discuss in our financial results for the third quarter of 2022. You can read further presentation slide material and we're going to start from Page 4. Before that I still want to remind you guys to read it all the Safe harbor Notice in the Page 2. Page 4 talk about revenue and the margin. Our Q3 '22 revenue was TWD 3.9 billion, Q-o-Q down 26% and the Y-o-Y was down 42% as expected earlier and due to a further decline in the capacity utilization rate from 60% last quarter to 40% this quarter, I mean Q3, so the gross margin declined by 14.2 percentage points, sequentially to 16% and operating margin declined by 19.2 percentage points to negative 5.1%. The gross margin is different from our expectations earlier mainly because we suffer a one-off valuation loss and the 100% owned subsidiary investment company whose main business purpose is for investment. And so we will have explanation for next page, in Page 5. In Page 5, about gross margin, our third quarter gross margin was 21.1%, if we exclude one-off factor because we recognized a one-off valuation loss on overseas investment targets and as I mentioned earlier our subsidiary, 100% owned subsidiary who is an investment company holding overseas investment targets, the company just went IPO this year and due to the significant volatility in the global equity market in Q3, so therefore we recognize that one-off valuation loss and also when it consolidated into our income statement, it impacts our gross margin by around 5.1 percentage point. Therefore, the consolidated gross margin become 15% in Q3. If we take that into consideration for the accumulated Q1 to Q3, total the one-off factor impact Q1 to Q3 income statement is 1.1 percentage point of the gross margin. Next page, Page 6, part of our earnings. The net profit for Q3 was TWD 245 million, Q-o-Q down 55% and Y-o-Y down 84%. The EPS came in at TWD 0.83 and last quarter was TWD 1.52. And please flip to next page, Page 7, to talk about product mix for this quarter. We mentioned that earlier, Steve had mentioned it in the management comments, for the consumer products including like cellular PA and WiFi PA is a consumer product, which is the decline is more significant. The cellular PA the percentage from 40% to 45% last quarter to this quarter is between 30% and 35% and the WiFi remain the same between 5% and 10%. And relatively it's more stable, it's a industrial product which is infrastructure, although there is still for the dollar value still have decline from Q2 to Q3, but the percentage is going up from 25% to 30% to the range of 30% to 35%. And that is telling everybody that industrial product is more stable, which is we still maintain Y-o-Y for the first 3 quarters of stable even growth, a little bit growth. And last one would be others, including 3D sensing, optical sensing and other subsidiaries income the total is at 26%, going up from 20% of last quarter. This is what product mix looks like. And next page, Page 8, talking about Q4 guidance. I think Steve have mentioned that just read it all again. We expect Q4 2022 our revenue to decline low teens Q-o-Q and we also expect Q4 gross margin will be between the level of high-teens and the low-20s. Then we can quickly go through the income statement for Q3 and the first, the accumulated Q1 to Q3. The net revenue for Q3 '22 it's TWD 3,909 million. I'm sorry I still want to remind everybody that the financial report, the figure, it's based on unaudited basis. The final results should be based on the CPA's report. So the net revenue TWD 3,909 million, Q-o-Q, down 26% and Y-o-Y down 42%. Gross profit become TWD 624 million and in consideration of the one-off factor about 5.1 percentage point then the consolidated gross margin will be 16%. Operating expenses TWD 822 million, so the OpEx ratio is 21% this time. Because of that, the utilization rates going down significantly to 40%. Normally we were traded all tax ratio should be in the range of maybe 12%, 14%, 15% this kind of range if the utilization can maintain 70% or 80% is kind of level or higher. But for this kind of low utilization rate is not applicable. Operating income becomes negative, operating loss TWD 200 million. The operating margin is negative 5.1% and the non-op income was TWD 500 million, the detail in Page 12. Income before income tax was TWD 299 million. The income tax expense was TWD 55 million, so the net income become TWD 245 million. The net margin was 6.3%. So the EPS for Q3 was TWD 0.83. The return on equity for this quarter was 4% and utilization rate, the approximate utilization rate for Q3 was 40% which is going down from 50% last quarter. Depreciation expense, it's a little bit more than last quarter, which is on TWD 1,038 million. The CapEx for Q3 was TWD 1,908 million, it's lower than last quarter. So this is Q3 result. The accumulated Q1 to Q3, the net revenue was TWD 14,803 million and Y-o-Y was down 22%, and the gross profit was TWD 3,939 million so the gross margin become 26.6%. The operating expense was TWD 2,476 million, so therefore the operating ratio -- expense ratio was 17%. The operating income was TWD 1,463 million and operating margin was 9.9% for accumulated 3 quarter. The non-op income was TWD 496 million, so the income before income tax becomes TWD 1,959 million. And income tax expenses was TWD 384 million. So net income for the first 3 quarters was TWD 1,375 million, therefore the net margin become 10.6%. The EPS for Q1 to Q3 accumulated Q1 to Q3 2022 was TWD 4.43. The return on equity for the first 3 quarters were 7% and approximately utilization rate accumulated become 55%. Depreciation expense for the first 3 quarters was TWD 3,147 million. We believe that the whole year's depreciation expense will be Y-o-Y will be less than 10% compared to last year. And CapEx for the first 3 quarters accumulated TWD 6,208 million which is -- we already -- in Q2's earnings call, we already postponed around 1/3 of the CapEx guidance and postponed from 1 -- around TWD 12 billion reduced to TWD 8 billion plus and minus. For the whole year of 2022, we're going to maintain the same view before as Q2's earnings call. And the major CapEx about our Kaohsiung fab, a new fab, we still maintain the same schedule, which is we got to complete the Kaohsiung fab until the first main building finish and then we are going to wait and see what's going to happen for the industry. Page 12, it's non-operating items. I think I highlighted 2 major item for Q3, which is the first one will be the gain on the ECB buyback which is, we did in Q3, it is a TWD 360 million of the gain. And another one will be the foreign exchange gain. Then finally, we're going to talk about consolidated balance sheet at September 30, 2022. I think the cash and cash equivalents are around TWD 10.880 billion. So our total asset TWD 70.398 billion. And our total liability was TWD 35.091 billion and the total equity was TWD 35.376 billion. So the book value per share become TWD 78.8, which is going up from TWD 77.67 in June 30th. And key indices including like current ratio becomes TWD 338 million since we pay out the dividend in this quarter. So the current ratio going a way up from 210%. And finally the debt ratio was 50%, a little bit going down. This is what I have. So now we begin the Q&A, So please just submit your question in the input box on the webcast window now. Thank you.

Okay. I think this time, yes, as in revenue is still going down and it's a very long correction period. I think WIN Semi listed our revenue is going down more in next 3 quarter, and I think everybody was really concerned about how the pattern will be. I think the quarter we see right now, we think the correlation should become very, it should be only at the end of the period. I think right now, what do we see the burden of these correction should be in the next year Q1, I think that should be the burden. And also the reason is because usually the Q1 is lower season of the year and after the Q1, I think the demand should be a little [indiscernible] things from Q2 next year. And so right now what we see the pattern of this correction now will be the next year Q1 and then quarter-by-quarter. Thank you.

Okay. There are couple of question regarding the Q3 utilization rate and then maybe for Q4 and also asking about operating expense, some kind of a question. As we mentioned, Q3 is huge utilization rate become 40%, it went down from 50% from Q2 and if to make for preliminary estimation for Q4, we just can't say that it could be maybe a little bit lower than 40% currently, but what is actually number still need some time. And for operating expense, I think aside this, I will talk a little bit about normally the growing pattern of at least we maintain about 70% to 80% or above that kind of utilization, then it's a bit easier to make the document that OpEx ratio can maintain in the range of around 12% to 14%, not even higher than 15%. But this time because the UT is dropping sequentially, so this kind of rule it seems not applicable, but we do whatever we can to keep-up the operating expense as low as possible and to see that from Q2 to Q3, the OpEx went down around TWD 30 million and of course, we hope we still can do something for Q4. For example, like we encourage the employees to take a vacation this paid out lower UT period and also keep the loading for our fast facility, but as you guys know that we see it being growing in the past several years and no matter the scale and number of our fab and the number of employees it's cheaper spending for many years. It's not very easy to control it and make the expense, operating expense very significant reduction but anyway, we will do whatever we can to keep the lower level of operating expense. That's about the OpEx and the OpEx ratio. Thank you. Okay. I think there has no further question, then I think I will more discuss about the trend of Q4 and our capacity allocation. Yes. I think as I just mentioned earlier the revenue from Q3 to Q4 was down to low teen percentage and this declined further we see is most of the application is facing a retail decline, nanometers, cellular PA, WiFi PA even 3D sensing or infrastructure. I think move to Q4 is the demand is a little weak in Q3. Yes. And so for application percentage for Q4, I think required average, I think each segment, maybe will drop around like 10% in this kind of range. And question, maybe you want to know about -- because of this kind of low valuation rate our capacity expansion plan in the future. As we mentioned before, right now our capacity is 41k wafer a month and at the end of this year, our Fab C will increase around like a 2k to 3k capacity, yes, and the Luzhu fab, I think right now we will only finish the shell of the building and for equipment, I think we will watch the market demand very carefully before we went up and of the demand and the IoT were raising up back to like 80%. I think we will sell down all new equipment trend expansion for the new fab.

I think there's a investor asking about the -- we suffered the on-off valuation loss in the one of our subsidiary and who are holding the oversea investment targets, who they are and then what happened. I think first of all, there's a China customer who just IPO in the market, equity market and before the IPO, we acquired product this year become the shareholder and of course this is a strategic investment to maintain the relationship with the customer and also I think this is a biggest major PA design house in China. So we are kind of expecting the financial profit for the long-term future and because of that we recognized the one-off valuation loss for our subsidiary and the impact at gross margin of 5.1 percentage point. Okay, that's the one. And another question from the investor including like there is recent leaders, lot of talking about WIN Semi kind of facing the price competition and also the market share those kind of issue. First of all, I think what we want to say is expecting, I'm sorry, except that the annual agreement, annual contract we may negotiate with the customer, otherwise, we don't have any kind of pricing down or any kind of pricing pressure at this moment or any kind of pricing competition. I think about the market share from one loss to our competitor from one of our major costumer I think crystal ball I think costumer pursuing the multiple source using the different foundry company as sourcing multiple sources. It's quite normal which means even in silicon semi they also using the multiple foundry company. But I can assure you that they have been working with WIN Semi since day one and we have very solid relationships and even at this moment they still have a lot of new chip out for new profit of technology for the next maybe one or 2 years product. So we don't see for Q3 or even Q4 the downturn it's nothing to do with -- outsourced their multiple sourcing policy. It's nothing to do with that. I mean even because of price competition, it's purely the inventory correction and macro environment making the demand weaker in Q3 or even Q4. So I think our relationship with our customers still very solid and they still using our advanced technology and for the future product and so we believe that the recent downturn has nothing to do with that. Thank you. Okay. There is a question related to CapEx footprint. I think right now we, like Joe just saying, we still cooperate with our customer very closely right now and discuss next business. So about our CapEx plan of next year, I think we still need some time to collect more customer information and data and we will give you more detail in Q1's conference call. Thank you.